Tuesday, June 30, 2009

Is the biotech sector cheap?


According to Dr. Steve Sjuggerud, biotech stocks are currently cheap, based on the price/sales ratio. At the tech boom peak, the P/S ratio was over 20. Today, due to last year's massive market decline and subsequent difficult financing environment, the P/S ratio lies at 3, near it's bottom during the late 1990's.

The media and public have also become enamored with green technology and the massive government boondoggle of tax-and-spend. My personal opinion is that clean technologies like solar and wind power won't gain meaningful traction for years, if not decades, and will only exist as long as government subsidies support their money-losing business models.

Biotechs have also participated in the huge rally since March 6, up over 30%. My cohorts and I have profited immensely as a result, a product of due diligence, prescient market timing, and frankly, instincts and luck. Fear ruled the market in early March, and it just smelled overdone. The due diligence on pivotal events catalyzed the outsized gains.

To summarize, Dr. Sjuggerud likes biotech for the following reasons: they're cheap, unloved, and in an uptrend. I'm just glad my buddies and I picked up on this trend a few months ago.

Monday, June 29, 2009

The disconnect between the market rally and the jobless economy

I've always posited this recent strong rally, while good for account values, was a bear market rally--a sucker's rally, if you will. While a 40% rally is legitimate by any measure, it's within a secular bear market. Why? Any recovery will be tepid, as industrial output is plummeting, cash- and credit-strapped consumers aren't spending, banks aren't lending, and the private sector isn't hiring. Barron's has a good article on the true measure of the state of the economy, tax revenue:

http://online.barrons.com/article/SB124579469824143923.html#mod=BOL_hpp_dc

I don't know when the market will wake up and realize how dire the prospects for worldwide economic growth are. But as long as central banks continue to print currency in an attempt to stimulate their respective economies, I suppose asset values can continue to rise. Aside from pivotal event-driven biotech stocks, and a few precious metal plays, I am on the sidelines, even if it means I miss the next 10 or 20%. It's never wrong to take profits.

It's been a good ride, but I am not going to fall in love with this market. I don't want my heart to be broken.

Sunday, June 28, 2009

Commercial real estate in real trouble

Not news to us, as the predicted bankruptcy of the General Growth Properties REIT was as inevitable as GM's and Chrysler's. But Deutsche Bank's analysis could be even grimmer than mine, if that's possible.

http://moneynews.newsmax.com/economy/commercial_real_estate/2009/06/23/228099.html

Thursday, June 25, 2009

Water shortage

Driving down Interstate Freeway 5 (I-5) through California's central valley, dubbed the bread basket of the world due to its rich farmland, I noticed some peculiar signs next to miles of browned-out fields, due to lack of irrigation. One sign seemed to be reasonable: Food Grows where Water Flows. But then the signs became increasingly hostile: No Water = No Jobs = No Future. The last one was a clincher: Congress Created Dust Bowl.

I had earlier purchased a water utility, and methinks a more comprehensive water play is in the cards, whether it's desalinization, pumps, filters, or water purifiers. Warren Buffett's Berkshire Hathaway made a large investment in a water company earlier this year. Not only is the drought causing supply disruptions, but demand is increasing due to population growth and industrial use. For instance, mining companies have been especially active with the Chinese hoarding natural resources, and drilling activities utilize massive amounts of water.

Do your part and conserve water--it ain't free. Oh, and by the way, obtaining a core holding in wheat, corn, and soybeans wouldn't be a bad idea either. Crop yields are diminishing this year due to droughts and floods. Yields were at all-time highs last year, and we still experienced food shortages.

Disclosure: I recently sold out of my commodities holdings, but investigating a re-entry point. I am currently long one water utility.

Monday, June 22, 2009

Market Correction

The pullback I anticipated is finally occurring and accelerated in the last few days. The only strategy that is working are my puts on the SP500, a cruise liner and for-profit educator. I completely sold out of my oil trade, and lightened up on my gold and silver trade last week (although, in hindsight, I should have sold completely out of it). It's never bad to take profits.

What is hurting me is hanging on to pivotal-event driven biotech plays, although any of these stocks can pop up upon an FDA approval, successful clinical trial, or big commercial order. I expect continued weakness into the summer months, so hopefully these binary events are positive, and occur soon.

Tuesday, June 16, 2009

Sunday, June 14, 2009

Russell Index Reconstitution

On average, when companies are added to the Russell indices, the share prices allegedly increase 47%, as indexed mutual funds have to buy them for their funds. And share prices for companies that fall out of the index fall 27%. I have yet to substantiate these claims, although they seem plausible.

http://www.russell.com/indexes/membership/Reconstitution/Reconstitution_changes.aspx

Inclusion into the Russell indices are predicated on the objective criteria of market capitalization, so there's no room for manipulation. Companies who get included naturally experience a rise in share prices, and it becomes self-fulfilling as index funds buying in increase more buying pressure. As an aside, it's somewhat comforting to see a handful of companies I own be included in the index.

Saturday, June 13, 2009

HEB

HEB message boards are gettings tons of chatter, most of it garbage, but it's usually emblematic of a pivotal inflection point in the share price, either up or down. Longs are expecting FDA approval of Ampligen for treatment of Chronic Fatigue Syndrome (CFS), a recently diagnosed debilitating medical condition. Patients and doctors swear by Ampligen's efficacy, despite the disease being marginalized in the past by the mainstream medical community. Now that CFS is recognized by the FDA, Ampligen's approval as an orphan drug (there are no other CFS treatments approved simply because CFS wasn't formally recognized as a disease) should be a blockbuster, according to long investors.

Ampligen has also been deemed effective as an adjuvant to flu vaccines in Japan and other countries, so the share price has spiked up in the last month from depressed levels. It has also been effective in clinical trials for boosting the efficacy of cancer vaccines in clinical trials. As Dr. William Carter, CEO of HEB stated in an interview last night, which is causing the uproar: "We have multiple shots on goal." See the June 4 blog on the swine flu.

Doubters (and shorts) will point to HEB's checkered history of FDA non-approvals and share dilution (altho HEB does already have one commercially approved drug for Alferon).

The pumping and bashing will continue unabated over the weekend, and the old adage "volume before price" will inevitably be proven again, as HEB will continue its high price volatility going into Monday.

HEB is a risky and volatile play. Do your due diligence. This is not a recommendation.

Disclosure: I am long HEB.

BDSI

My entry yesterday on FaceBook: "Someone BIG hit the ask hard on BDSI before the close. A few hundred shares trade here and there, and then a huge 176,000 share buy hits the tape. Someone wants in before Monday's FDA decision. Spiking up in after hours. Good thing I doubled down this am..."

A massive buy at $6.78 for 176,000 shares occurred at 15:38:37, just before market close, surrounded by normal closing out of positions on a scale of a few hundred shares. Clearly, a hedge or mutual fund wanted in before Monday's expected FDA decision on Onsolis, a pain medication for cancer patients. The FDA made a favorable assessment of the drug and delivery technology last October, but due to a change in policy on monitoring potential addiction, BDSI was required to re-format data to the new standards, REMS. The Complete Response Letter delayed the approval date until June 15, 2009, so the recent run up in share price is in anticipation of successful approval. To long investors, FDA approval is a slam dunk Monday. With the FDA, nothing is ever a slam dunk, so we'll have to wait and see.

Having said that, I doubled up my investment yesterday morning. So far, it is paying off as the big trade before yesterday's close drove up the shares to above $7.50 in after hours. BDSI is a conservatively run company, focusing on existing approved drugs delivered by innovative but effective technology. They have managed their finances well, securing a partnership with Meda, which includes milestone payments, so their cash position should be solid with little dilution to existing shareholders. The short interest is low (but climbing), so I don't expect a big short squeeze, but a steady increase after an initial spike up Monday. The breakthrough drug delivery technology and two other drugs in the pipeline should provide for a sustainable company going forward.

If for some reason, the FDA delays a decision again with the infamous "approveable" letter, BDSI shares drop back to $3. I would probably buy more at depressed levels, knowing approval is imminent, if not impending. If Onsolis is approved, BDSI should see the teens.

This is not a recommendation. Due your due diligence. Investing in biotech stocks is risky, and you can lose all or most of your investment. Good luck to all.

Disclosure: I am long BDSI.

Wednesday, June 10, 2009

Dissecting a Manic Bubble and Subsequent Crash

I took an on-line course at MIT on Behavioral Economics, and one of the topics was manias and asset bubbles. I'll leave out the higher math equations, and summarize what seems painfully obvious, but illustrative nonetheless.

Every asset bubble has similar characteristics, whether it's the Tulip Mania, the South Seas Bubble, the Internet Bubble, or whatever we experienced in 2008 (let's call it a Subprime Mortgage crisis).

1) First, you have to have a catalyst (tulips, internet, real estate, easy money),
2) Then, smart money insiders quickly claim stakes (railways, gold, securitization, IPO's),
3) Development of infrastructure to sustain the bubble for the mainstream citizens (setting up exchanges, networks, charters, assessors, government subsidies)
4) Authoritative blessing (government approval, official government support, parliamentary passage, AAA credit ratings),
5) The inevitable crash (stock market crash, real estate crash, defaults, bankruptcies, foreclosures),
6) Post-crash political reaction (regulation, litigation, fraudulent activity, accounting reforms, creation of government agencies).

The discomforting fact is that bubbles need an inflow of progressively more naive investors, much like a malignant tumor needs blood to metastasize. Prognosticators who predict these crashes in the midst of a bull market are demonized as heretics. These manias can be back-dated several hundred years, and the similarities are eerily haunting. Let's hope we don't go overboard with step 6 and put a death chokehold on our economy this time around.

The consequences of corruption

Our tax dollars are defending crooks at Bank of America (Countrywide Savings). Anthony Mozilo and his fellow subprime mortgage mafioso ripped off the public, and now we, the taxpayers via bailouts, are paying for their legal fees. They are being sued by the SEC for cooking the books and insider trading. Criminal indictments are pending. Anything wrong with this picture?

http://www.bloomberg.com/apps/news?pid=20601103&sid=aTwT9deWspHo&refer=us

GM = The future of the US?

Bill Gross: GM Failure a Preview of Our Future Economy

Monday, June 8, 2009 1:25 PM

By: Julie Crawshaw Article Font Size

The General Motors failure is a harbinger of things to come for the United States as a whole, says bond guru Bill Gross.

"I think it is important to recognize that General Motors is a canary in this country's economic coal mine; a forerunner for what's to come for the broader economy, the Pimco co-CEO writes in a note to investors.

"Their mistakes have resembled this nation's mistakes; their problems will be our future problems."

The most significant comparison between GM and the U.S. economy is the enormous unfunded healthcare and pension liabilities they share, Gross says.

“Reportedly, $1,500 of every GM car sold in the dealer showrooms goes to pay for current and future health benefits of existing and retired workers,” Gross points out, making the car manufacturer liable for nearly $60 billion in healthcare costs.

“The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions,” Gross notes.

A study to be published in the August American Journal of Medicine — the first-ever to be based on a national random-sample survey of bankruptcy filers — shows that illnesses and medical bills contribute to a large and increasing share of consumer bankruptcies.

"The U.S. healthcare financing system is broken, and not only for the poor and uninsured,” writes study author David U. Himmelstein, M.D.

“Middle-class families frequently collapse under the strain of a healthcare system that treats physical wounds, but often inflicts fiscal ones."

© 2009 Newsmax. All rights reserved.

Phase 6 pandemic alert for swine flu?

According to several news sources, World Health Organization's (WHO) Margaret Chan may declare a Phase 6 pandemic alert for the H1N1 virus today in Geneva. It is spreading rapidly in other continents besides north America, which should result in the pandemic alert upgrade.

The virus is spreading in the southern hemisphere during its winter season, and Australia is experiencing rapid infection rates. It should hit the northern hemisphere especially hard in the fall, although Canada has had a huge jump in cases already. The concern is that there are many more unconfirmed cases, as authorities are no longer undergoing extensive testing.

The avian virus (H5N1) is far more lethal, with a 60% mortality rate, while the H1N1 is virulent, if not as lethal. H1N1 human to human transmission is quickly spreading across borders, and medical authorities are concerned that a mutation of the season flu, avian flu, or swine flu could make new strains virulent AND lethal.

A Phase 6 pandemic alert will restrict trade and travel, further deteriorating world economies, but it may be necessary to control the spread of these flu viruses. It will take a massive cooperative effort from medical agencies worldwide to control the spread of these potentially deadly viruses. Stay healthy.

Tuesday, June 9, 2009

Is it time to take profits on the reflation play?

We've participated in a strong rally in commodities, including energy, crops, and precious metals, achieving triple digit gains in some cases.

Actually, I've already lightened up on some major gold mining positions, and replaced them more speculative gold prospectors with impressive track records and land holdings. This should give me more upside on any advances in rallies in gold, but also gives me more exposure should gold correct. Short-term, this could be a mistake on my part, but long-term, it should pay off if they continue to find more gold deposits.

Is this rally in hard assets sustainable, given my bearish outlook on an economic recovery? The rally can be explained due to dollar weakness and poor participation in long-dated US Treasury bond auctions. In other words, we called it right. But has this rally gone too far too fast? Will I be able to pick up these same assets at a lower price in the future, once this phantom economic recovery is exposed? Personal and corporate debt is still strangling the US consumer, and government debt is at an all-time high with no end in sight. Can China's recent upsurge in demand replace continued demand destruction in Europe and the US?

I'll continue to play the binary-event driven biotechs, hoping for continued outsized gains. The overall market could become irrationally extended despite deteriorating fundamentals, climbing the "wall of worry". But I feel the need to lighten up just a little more to lock in profits. I may miss out on the absolute top, sacrificing another 10-20%, but at current levels, I believe there is more downside risk. I hope I'm wrong, but I can't act on hope alone.

Most people are terrible market timers, and I am one of them. Generally, I will miss the exact bottoms and tops of markets. But if I can participate in the majority of a big move, like the rally since March 2009, and if I can avoid the majority of a big decline like I did in 2008, I can live to see another day.

Investing is risky and you can lose most or all your investment. Please do your due diligence. Good luck to all.

Saturday, June 6, 2009

Is ARNA finally getting its day in the sun?

http://news.yahoo.com/s/nm/20090606/hl_nm/us_arena_obesity;_ylt=Agl0ZWk9m9Vdus.M9J3KpqXVJRIF;_ylu=X3oDMTJsNWlvcTc3BGFzc2V0A25tLzIwMDkwNjA2L3VzX2FyZW5hX29iZXNpdHkEcG9zAzEEc2VjA3luX2FydGljbGVfc3VtbWFyeV9saXN0BHNsawNhcmVuYWNvbXBsaWE-

I believe I got it right on ARNA, even if Wall Street analysts misinterpreted the Bloom trials top-line data on March 30, condemning the efficacy of Lorcaserin as "disappointing". There was agreement on the safety profile and tolerability of Lorcaserin, but the media focused on the 5% mean weight loss above placebo criterion. What they missed were the FDA guidelines on categorical weight loss of 5% and 10%, which Lorcaserin exceeded. The minimum 5% categorical weight loss also had to be above 35%, which was it was at 47.5%, which meant almost half the subjects experienced at least 5% weight loss on Lorcaserin, whether they dropped out of the trial or not. Upon further data analysis, almost 67% of subjects on Lorcaerin who didn't drop out of the trials lost 5% or more body weight.

The primary end points of weight loss were met, as were secondary end points like improvements in blood pressure, cholesterol, triglycerides, lipids, glucose levels and quality of life.

The number of overweight Americans is approaching 200 million, with 100 million of those obese, so the market potential for weight management drugs is huge. Phen-fen was a blockbuster, but due to heart valve problems and countless lawsuits later, it was recalled. Lorcaserin's tolerability and safety profile was favorable, with comparable rates of depression and cardiac valvulopathy in the placebo group. The probability of FDA approval in 2010 has increased with the latest news.

Blossom results will be announced in September, and the Bloom-DM trial for diabetics will also wind up soon. Expect a partnership agreement with a big pharma later this year, which should ease cash flow concerns and clear the path to an NDA submission in Q4 2009, and PDUFA in Q4 2010.

Disclaimer: Do your due diligence. Investing is risky and you can lose most or all of your investment.

Disclosure: I am long ARNA shares and also write covered calls.

Friday, June 5, 2009

GM

I stayed out of debates about GM's bankruptcy lately, mainly because I said my piece on GM months ago: let the dinosaur die, clean out the excess, corruption and legacy costs, and salvage the remaining pieces of value. Emotions pollute the debates, so to me, the trade was to short it 2 years ago, get out, and move on. Instead, the government decided to spend billions bailing out GM, and then billions more in an extended, painful bankruptcy, in order to assuage a corrupt UAW and government cronies, screwing senior bondholders in the process. Let's just throw out contract law while we're at it.

With $50 billion more of taxpayer money designed to own 60% of GMW (the "W" denotes bankruptcy), that places the market value of GM at $83 billion, which puts it on equal footing along with companies like Google and Apple.

Guess where the smart money will park their money? Not in the "new" GM.

Thursday, June 4, 2009

Funny post from an ARNA long:

I thought this post on ARNA's message board was funny--and fitting:

Shorts are pounding on your door hatch.

You're in your bunker with a gazillion ARNA shares.

You hear the screams and cries of the torched shorties outside.

"PLEASE FOR THE LOVE OF GOD HELP US!!" - Sauve9

Swine flu revisited

In the bad news, good news category:

Bad news first: the swine is spreading rapidly, despite declining media coverage.

Good news: my two swine flu plays are doing well.

HEB has a history of FDA non-approvals, but is expecting a PDUFA decision from the FDA any day now, for approval of treatment for Chronic Fatigue Syndrome (CFS). CFS's acknowledgment as an official indication itself is controversial, and thus there are no current approved treatments for it. That's why HEB's Ampligen has so much potential, as patients and doctors in clinical trials swear by it. After being barely able to function, some patients on Ampligen have their lives restored.

But Ampligen is also being reviewed in Japan, Italy, and Australia (among other countries) for use as an adjuvant with vaccines to combat season flu, avian flu, and swine flu. Apparently, Ampligen in conjunction with other vaccines shows clinically significant efficacy.

I have sold 40% of my HEB holdings, locking up to 100% gains, and letting the rest ride in case they get approval for CFS. Any orders from the increasing threat of rising flu cases will provide further upside in the price per share.

BCRX is developing an anti-viral (vs. a vaccine) which shows efficacy in reducing symptoms for those with severe flu symptoms. Roche's Tamiflu is largely ineffective against some mutated influenza strains and GSK's Relenza has also been marginalized against resistant strains. BCRX's Peramivir intravenous dosage has been so effective against multiple flu strains in clinical trials that they are being evaluated for Emergency Use Authorization (EUA) despite not being FDA-approved (currently Phase II).

In Japan, they are in Phase III with fast-track approval targeted for 2010. Shionogi, their marketing partner, is working furiously to get approval in China, South Korea, Taiwan, and Hong Kong as well. East Asian countries are far more sensitive to influenza due to close living quarters and an aging population in Japan, which increases mortality and morbidity.

I believe WHO will raise the pandemic alert to Phase 6--the highest level soon. Despite the swine flu's rapid spread, confirmed cases are being under-reported for various reasons, whether political or just lack of testing facilities. For now, the H1N1 virus has been proven virulent, if not as lethal as its avian flu cousin (H5N1). But if they somehow mutate these winter seasons in the southern hemisphere, and then later in the northern hemisphere, we could have a strain that is both virulent AND lethal.

These are highly speculative investments, and these are not recommendations. Please do your own due diligence.

Disclosure: I am long BCRX and HEB.

German Chancellor bashes the US monetary policy

Merkel is the latest foreign leader to blast the Fed and US Treasury. According to Eric Roseman:

“Over the last 12 months we’ve witnessed one of the most stunning economic crashes in history…whereby bank balance sheet risk has been transferred from the private sector to government.”

“And, with the printing presses now on full blast, it’s no wonder investors – especially the Chinese – are growing nervous as Treasury prints bonds like there’s no tomorrow. Almost on a weekly basis Treasury is auctioning tens of billions of dollars of U.S. paper.”

“According to Bianco Research, the aggregate cost of the U.S. bail-out program is now estimated at $4.2 trillion dollars – larger than the inflation-adjusted cost of WW II.”

“Grant’s Interest Rate Observer pegs the current stimulus at roughly 30% of GDP, or gross domestic product. To put this monster into perspective, the total sum of all fiscal and monetary measures during the 12 previous U.S. economic downturns since 1929 comes to a mere 39% of GDP.”

“What’s truly alarming is not only the aggressive attempt to balloon credit but the failure of the Federal Reserve to mop-up excess Treasury sales… “

“Like Britain, Germany, Holland and Ireland among others, the United States has struggled to sell longer dated government bonds recently. The risk is growing that one or several sovereign issuers will fail to auction off debt; this has already happened four times in Germany since last October – a spectacular upset because Germany is the world’s second most liquid bond market and in my eyes a far stronger credit risk that any other nation – including the United States.”

“Government has swept this crisis under the rug.”

“We all better hope that investors don’t force government bond yields much higher…because it might result in another disaster as mortgage-backed securities, CDOs, mortgage rates, housing prices and other loans tied to intermediate term rates are forced higher. Consumers can’t handle high rates.”

“We are now in the latter stages of debt deflation – saved by government. World governments will eventually succeed in growing the economy again through the monetization of debt and ultimately will fail to arrest inflation as it develops again over the next 12-36 months.”

“The consequences of this policy action will be horrendous down the road for most assets, except gold, commodities and TIPS as another dollar and possibly, euro crisis, hits the fan.”

Wednesday, June 3, 2009

Devil's Advocate

I visited a former colleague yesterday, and presented the weak dollar/strong commodities thesis to him, with some agreement. As many of you know, this huge rally has been great for our account values, but it has made me increasingly nervous. I've asked for counterarguments against these plays, and was looking to poll some of you in our email threads last night. After a long day, I was too tired to post, so I will do so today:

1) Despite success in our holdings so far, what could derail the current rallies in commodities? Hubris is not a virtue when markets turn south.

2) Are our pivot event-driven microcap biotech stocks immune to an overall market downturn, or are we merely decline-resistant?

Well, today's actions confirms my suspicions--even if precious metals are a hedge against inflation (as are other hard assets), when the market tanks, it takes almost every sector with it (unless you are short the indices). If individuals, hedge funds and in hard times--institutional investors have to raise cash, they will sell any asset class, whether it's a gold ETF, REIT, or just regular old equities.

Having said that, nothing goes straight up (I know I have been redundant here), and corrections are healthy. The pertinent question is this a correction, or the start of another demand destruction decline?

On equities, I'm still of the opinion that we have been blessed with a strong rally since March 6, enclosed within a secular bear market. I still see too much debt within the consumer, corporations, real estate, as well as public sectors. Foreclosures and unemployment are rising, this time infecting borrowers with good credit, not just sub-prime borrowers. Commercial real estate defaults are exploding. And with 70% of our nation's GDP consumer-based, all these entities are in the de-levering mode--of course, with the exception of our nation's exploding balance sheet. And if consumers and businesses aren't opening their wallets, every attempt by the economy to recover will fail.

So where does that leave commodities? I suspect a bifurcation between commodity prices and equities overall. Even tho the world will consume less energy due to industrial and consumer demand destruction, inflation is still the boogey-man, mainly because the US Treasury has printed too many dollars. The pivot point is when those dollars start circulating through the economy, creating a multiplier effect. Currently, banks are hoarding dollars in order to recapitalize their toxic balance sheets. When and if commercial bank lending resumes, the Fed will be powerless to turn off the spigot, igniting inflation. It will be too little, too late. It is political suicide to raise interest rates and reign in money supply while citizens are losing jobs and their homes.

Will I be proven right? Nobody knows, but so far, the market agrees with me, as history has shown with 100% accuracy central banks are always late in closing the discount window. And with the economy on such shaky ground, I predict they will be late again in tightening monetary policy.

Conclusions? Commodities remain in a secular bull market--one that started in 2001, and one that corrected immensely in 2008, due to the financial crisis. In other words, we will experience a correction, and gold may correct 10% perhaps. But eventually, inflation will take root, as central banks worldwide attempt to stimulate their respective economies. Besides, inflation reduces the debt burden. In a perverse situation, central banks now want to INDUCE inflation, instead of trying to manage it. And as long as the Fed is intent on trillion dollar deficits, the US Treasury will continue to issue trillions of dollars of paper. Savers will be destroyed, and debtors rewarded. With the US government the biggest debtor in the world, guess who benefits from inflation?

As for the stock market, this bear market rally will also experience corrections, and could even go higher with the S&P 500 touching 1100. But don't count on us reaching our all-time highs. I don't see that in the cards, and if we do, it would be the short of our lifetime.

Having said that, I would appreciate counter-arguments. Sometimes losing money is more instructive, and despite our recent gains, my anxiety level is heightened. I even sold some of my winners earlier this week, and bought a few SPY puts last week. Turns out I may have been early with the puts, but better early than late.

Tuesday, June 2, 2009

US Treasury Bonds and the Chinese

If this wasn't so true, it'd be hilarious. I couldn't have said this better, so I will quote Steve Sjuggerud:

An Embarrassing Day for America: What it Means for Your Investments
By Dr. Steve Sjuggerud

Yesterday, a bunch of Chinese people laughed at us...

What was the joke? U.S. Treasury Secretary Tim Geithner told a crowd of students in Beijing that the trillion dollars worth of U.S. government bonds the Chinese hold are "very safe."

Students laughed. They know the truth.

It was an embarrassing day for America. I never thought I'd see it...

In my career, I've learned there's nothing surer in finance than this: When a Treasury Secretary explicitly tells you "your money is safe," then your money is in big trouble.

I started my career covering emerging markets. One of our running jokes was "He's as honest as a Latin American politician on the eve of devaluation."

You see, the statement "we will not devalue the peso" was one of the simplest indicators we followed. When we heard that from a Latin American politician (and especially a treasury secretary), we knew the peso in that country was about to be devalued. It was almost a lock the country's currency was about to crash.

Why? The simplest answer is, when your country's currency is safe, you don't have to tell people it is... You never hear the Swiss or the Norwegians begging you to "just trust us," for example.

And it's not just Latin America...

On June 30, 1997, Thailand's prime minister declared, "We will not devalue our currency." Two days later, Thailand's currency lost half its value. That was the first domino to fall. Soon after, several Asian countries devalued their currencies. And yes, before each devaluation, each finance minister said the currency wouldn't be devalued.

While it's not so rare in emerging markets, it hasn't happened in recent times in large, stable countries – particularly countries like the U.S. The last time I can remember is back in 1992...

In August 1992, England's treasury secretary Norman Lamont said, "There are going to be no devaluations... We will do whatever is necessary, and I hope there is no doubt about that at all."

Soon after, George Soros made $10 billion betting against the treasury secretary. England devalued its currency, and Soros became a billionaire on one of the most famous trades in history.

This week, U.S. Treasury Secretary Tim Geithner meets with Chinese leaders. His top goal is to reassure them their money invested in U.S. dollars is safe.

But I think the treasury secretary doth protest too much. The historical record is terrible. Position yourself accordingly.

Good investing,

Steve

What the markets are telling us...

With the US Dollar in a free fall, along with US Treasury bonds, and hard assets soaring in price, the markets are giving us a clear message: no central bank can support the world's reserve currency when that country is also the world's largest debtor. Despite US Treasury Secretary Geithner's protestations that the US economy is "resilient and dynamic", the Chinese are curiously publicly silent on the subject during his visit to China. Perhaps they are being polite.

But they are connecting the dots: trillion-dollar deficits, coupled with profligate money supply creation can only create inflation and currency devaluation. In other words, they have every reason to be concerned about their US Treasury holdings. While they may publicly declare US Treasuries are the "only game in town" for their reserves, it seems a bit disingenuous when you consider they have been secretly doubling up their gold holdings in response to the dollar's devaluation.

Monday, June 1, 2009

Our government

William F. Buckley Jr.: "I would rather be governed by the first 400 names in the Boston telephone book than by the faculty of Harvard University."

Washington, DC and Sacramento, California: take note.